Gold breaking out?

It is time to examine the technicals of gold again. Recent pronouncements by Soros and others have predicted the drop in the price of the "barbaric metal" yet Soros himself has holdings in gold stocks. So, we need to re-examine the trading pattern of gold.

The graph shows the price of gold in USD since March of 2009. Several factors are of importance as technical indicators:
1. Gold formed an upward wedge pattern from May 2009 till September 01;
2. Gold broke out of this wedge on the upside on Sep 1;
3. The subsequent rally took gold to 1225 as an interim top;
4. So, the change from 875 to 1225 was $350;
5. Gold then corrected beginning early December 2009;
6. The correction formed a downward wedge;
7. During all this time gold remained in a bull market as indicated by the 50 DMA staying above the 300 DMA;
8. Corrections tend to run the Fibonacchi numbers: 1/3, 1/2 or 2/3 of the breakout;
9. Of the $350 upmove in gold price the Fibonacci numbers would be 117, 175 and 234:
10. Gold broke out of the downward wedge late February and can be expected to resume its rally.

How far will gold rally? That is hard to say. Perhaps 1450, perhaps 1500. Most analysts I read feel that the Stock Market will tank again during the Summer, or maybe the Fall and that this will pull down gold and gold stocks. The FED then has to do more printing to stave off the recession and so gold will take off again toward another plateau of 2200 next year.

Another important technical is the GOLD/XAU ratio, which is the gold price to gold miner index ratio. When this reaches 5, gold stocks will rise at least 3X faster than the price of gold. This ratio is now at 6.91. So, we can expect gold mining stocks to do well, unless this pattern gets blown away.

How about silver? The gold to silver ratio is unusually high now and one would think that silver miners would increase even faster than gold miners. That expectation might or might not materialize. Most of the reaction of gold price is due to it being the true money, but silver is not merely money, but also an industrial commodity. An the use of silver right now is not pushed very hard by industrial demand.